Challenges of the legal cannabis industry highlight NYSSCPA symposium

It was standing room only at the Marijuana Symposium: Business, Tax and Legal Implications, sponsored by the New York State Society of CPAs. New York is one of 28 states that have legalized marijuana for medical purposes, but it is not among the eight states that have legalized recreational marijuana. If the momentum toward legality includes all states by 2020, U.S. retail marijuana sales could reach $35 billion.

Growing pains: New York state senators Diane Scavino and Liz Krueger talked about the regulatory hurdles legal marijuana businesses face. In her keynote address, Scavino said many problems stem from the fact that the drug remains on the federal government's Schedule 1 status as a dangerous substance that has no accepted medical treatment use. Therefore, there is no insurance coverage for medical marijuana, banks will not open accounts for these firms, they cannot pay tax with marijuana proceeds, and they are not allowed to deduct normal business expenses. For the industry to truly thrive, marijuana must be descheduled, she said. Krueger agreed and noted that criminalization has already done too much damage to New York communities. The state has some of the most “draconian” drug laws in the country. “It's time to legalize, tax, and regulate,” she said.

There is also a great concern that the nominee for U.S. attorney general, U.S. Senator Jeff Sessions, who has come out heavily against marijuana legalization, for both medical and recreational use, will crack down and stifle industry growth.

Amid all of the political and economic challenges, panel moderator Debra Borchardt (Forbes) asked whether there was anything positive about going into this business. Hillary Peckham (Etain Health) is one of five licensed operators in New York for medical marijuana and struggled to get her business up and running. But financial success is not the primary reward. “We now have about 50 children who used to have 100 seizures a day and after using our product are now down to about one seizure a month,” she said to an audience that burst into applause.

Valuation nuances: “In my 30 years of doing business valuation, I thought I had seeneverything until I got involved in this industry,” says Ron Seigneur (Seigneur Gustafson LLP), calling the appraisal of a legal marijuana firm the “ultimate challenge.” His practice is based in Colorado, one of the first states to legalize adult recreational marijuana, and he has done about 20 valuations so far.

A dearth of comparable transactional data from the market means that appraisers must rely on the income approach. Revenue projections can be especially tricky, but Seigneur uses management interviews and site visits to examine the size of the facility and the nature of the technology in use. Drawing from his experience in this industry, Seigneur is then able to estimate potential production. Using third-party resources, such as Cannabis Benchmarks, which tracks national prices, and the number of harvests (average of 5.5 per year), you can project out the revenue side. Of course, risk is a major factor, he pointed out, with company-specific risk premiums ranging from 30% to 40%.

He also advised that, when valuing a cannabis firm, particular attention should be given to the “four L’s”: license rights, lease, location, and legislative environment. In terms of licensing, the relevant questions to ask are:

What are the requirements and limitations pursuant to a specific jurisdiction?

If the entity is associated with a garden, are there additional requirements?

Are there specific residency requirements?

What are the restrictions on transferability?

Can a license holder also hold other licenses or be involved in ancillary enterprises?

What are the reporting provisions and how well is the enterprise positioned to comply?

Licensing data: The Marijuana Licensing Reference Guide,2017 edition,co-published by Cannabiz Media and BVR, gives a comprehensive look at state-by-state marijuana licensing details, as well as in-depth analysis of 10 critical factors that affect businesses amid the explosive growth of the cannabis industry.